The Cult of GDP: Can Economies Function without Growth?

The Cult of GDPCan Economies Function without Growth?

Faith in unlimited growth has been shaken since the start of the financial crisis. Some economists are already questioning the wisdom of the more-is-more philosophy, with its emphasis on constantly rising economic output. But just how important is growth to an economy, and does it actually make people any happier?

How is the German economy doing? Has it emerged from the worst of the
economic crisis?

There is probably no one in Germany who can answer those questions -- questions which are currently on everyone's mind -- quicker or more precisely than Norbert Räth. His response consists of a single number.

Räth, a white-haired economist in his late 50s, is sitting in his corner office on the eighth floor of the Federal Statistical Office in the German city of Wiesbaden. He is in charge of the agency's Group III A, which addresses issues relating to the national accounts, used to measure the country's economic activity. If the national accounts can be characterized as Germany's balance sheet, then Räth is the country's senior accountant.

His office compiles all key economic data relating to Germany, including figures on building permits and hotel stays, poultry slaughter and automobile repair, even data on the amount of tax paid on sparkling wine by wineries. "We have data on every payment made," says Räth.

The sources of all this information include tax offices, associations and a monthly survey of 23,500 production companies. In the past, the data arrived in Wiesbaden on tons of paper, but today everything is done electronically. Once every three months, Räth recompiles the data and comes up with a figure representing the value of all goods and services produced in Germany: the gross domestic product, or GDP. In the second quarter of this year, German GDP amounted to 596.67 billion ($875 billion), up from the previous quarter's figure of 593.3 billion.

While the absolute totals are only of interest to the professional world, what makes headlines is the rate at which GDP changes. According to Räth's latest figures, Germany's GDP increased in the second quarter of 2009 by 0.3 percent compared to the previous quarter. It's a figure which is of vital importance to the country.

Everything revolves around this number, and everyone is fixated on it. Hardly any politician, whether they are from the center-right Christian Democrats or the center-left Social Democrats, much less the pro-business Free Democratic Party, would ever think to seriously question it. Growth generates jobs, growth produces social wellbeing, and growth creates affluence for all. This, at least, is the economic policy gospel, proclaimed and eulogized on every market square in Germany during the current election campaign. And at this week's
G-20 summit in Pittsburgh, the heads of state and government in attendance will once again be invoking the dynamics of growth. But the good news has lost some of its luster.

Not Just Cranks

There are now plenty of skeptics who seriously question the value of constantly rising economic output. And these critics are not simply cranks who are opposed to change in general. In fact, they are respected individuals who have the courage to reflect on whether growth is always synonymous with progress -- and whether stagnation automatically implies regression.

"Our affluence has quadrupled in the last 40 years. But at what price?" asks Kurt Biedenkopf, a member of the Christian Democratic Union (CDU) and the former governor of the eastern state of Saxony. The growth rate is "no longer a clear indicator of rising affluence," Biedenkopf told SPIEGEL in a recent interview.

Even German President Horst Köhler is suspicious of politicians' assurances that growth is indisputably beneficial to society. "We have convinced ourselves that permanent economic growth is the answer to everything," Köhler said in March, in the midst of the financial crisis. It was an astonishing statement, coming as it did from a professional economist and former head of the International Monetary Fund. And yet Köhler did not reveal what the correct answer could be. Stagnation, perhaps? Or even contraction?

Apparent certainties are now beginning to falter, as a broad front of critics of the system develops. They question whether it is really necessary for consumers who already have everything they need, to consume -- and throw away -- more and more each year. And they are also searching for new methods of measuring well-being, applying criteria like healthcare and level of education. French President Nicolas Sarkozy attracted attention last week when he proposed such an
alternative way of measuring wealth.

Bigger, Faster, More

We have become used to a constant thirst for growth. We constantly want more of everything, and we want it faster. But where does that all lead? From a purely mathematical perspective, a growth rate of 3 percent -- a target for many industrialized nations -- means that economic output doubles in just 24 years. To take a concrete example, if a German consumer currently buys six pairs of shoes a year, he or she would buy 12 pairs in 2033. Assuming the same rate of growth, does this mean that they would buy two dozen pairs in 2057?

Nowadays people in the West "have more food, more clothes, more cars, bigger houses, more central heating, more foreign holidays, a shorter working week, nicer work, and, above all, better health," writes British economist Richard Layard in his book "Happiness: Lessons from a New Science." "And yet they are not happier," he continues. This raises a simple question: What is the purpose of growth in the first place? And why is there such a cult based around GDP?

To answer these questions, we simply have to imagine the consequences if there were to be a long period with no growth. If that happened, all of the vital functions of society would soon collapse. In other words, Germany is more or less doomed to continue growing.

The German economy has to grow to offset constantly rising productivity and the resulting decline in demand for labor, otherwise there is the risk of higher unemployment. It has to grow so that incomes can rise each year, or else societal conflicts over income distribution will intensify. It has to grow to pay for the social welfare state, or else society's safety net against illness, unemployment and poverty in old age will become unaffordable. Finally, it has to grow so that the state can continue to service its debt, or it will lose its ability to manage its own affairs.

Banks, in particular, are dependent on growth. They are only willing to lend money to companies who want to invest if they can expect to be repaid with interest, so that they can then lend the money to others. This system of permanent money creation only functions in an expanding economy. For generations, everything in Germany has been geared toward constant growth and expansion.